Rebate ban would not necessarily equal savings, Icer says

An Icer white paper provides ammunition for both PBMs and pharma before the next Capitol Hill hearing.

When executives from five pharmacy benefit managers make their appearance on Capitol Hill next month they will have new ammunition to help them argue that a ban on rebates would not lower costs for insurers and patients.

A white paper by the US cost-effectiveness agency Icer suggested that the unintended consequences of various approaches to a rebate ban could lead to higher insurance premiums for enrollees and might not result in lower net prices. And shifting to up-front discounts, an alternative to rebates, could reduce payer negotiating leverage and increase biopharma’s pricing power, Icer said.

This latter point could help explain why pharma has supported President Donald Trump’s proposal to withdraw the legal “safe harbour” for rebates in the Medicare and Medicaid government health insurance programmes, which might spell the end of rebates as early as this year (Rebates are dead, long live discounts?, August 1, 2018).  

And the question of whether removing rebates could give pharma companies too much power will no doubt arise when executives from CVS, Cigna, Unitedhealth and other pharmacy benefit managers (PBMs) testify next month in front of the Senate Finance Committee. 

That PBM hearing will follow last month's meeting featuring the chiefs of big pharma companies, in which these executives decried rebates but were less full-throated about list price reductions.

Rebate debate

Big pharma has managed to shift the role of villain onto the PBM, citing rebating as an opaque process that drives up list prices, which in turn drives up enrollee cost-sharing since it is based on list price.

The pharma sector argues that because PBMs, which negotiate prices on behalf of health plan sponsors, get to keep a cut of the rebates, they have an incentive to favour drugs with higher list prices since they can achieve a bigger rebate on these. Pharma also argues that companies must increase their list prices to remain profitable as the rebate gap grows.

Icer has not taken a side in the rebate debate, but rather has laid out the potential tripwires that could result from a blanket ban on rebates, considering the complexity of revenue flows within pharmaceutical manufacturing and distribution.

The white paper examined three options for reforming rebate practices: rebates flowing back to plan sponsors, rebates flowing back to enrollees, and up-front discounts. All of them have their advantages, of course.

If rebates went back to plan sponsors this would, for example, reduce the incentive for PBMs to favour drugs with higher list prices. And with lower drug costs overall health insurance premiums charged to enrollees could be reduced.

An arrangement where the rebate flowed back to enrollees would save the most for those with the biggest drug expenses.

Meanwhile, switching to up-front discounts would be the most transparent form of setting prices in that the effective price would be known by companies immediately, rather than retrospectively as is the case with rebates that are based on volume. The up-front discount model would also be the easiest on which to apply cost-effectiveness criteria to drugs.

Flaws

However, all of these options have their flaws, Icer noted. If all of the rebates flowed back to the plan sponsors or the enrollees, PBMs would have less incentive to negotiate for lower prices. In the option where the rebate flowed back to enrollees specifically, plan premiums could rise broadly because that money would not be available to plan sponsors.

And, in the case of up-front discounts, biopharma’s pricing power would be enhanced, and could impede efforts to implement outcomes-based or indication-specific pricing, which depend on long-term outcomes and retrospective rebates, according to Icer.

Rebates have become a part of the drug pricing landscape for a reason, in that PBMs are asked to get the best possible price for their customers, the plan sponsors, and can offer volume to pharmaceutical manufacturers in return.

They might counterintuitively contribute to inflation, but other factors driving up drug prices include a lack of competition in specialised disease areas, expensive new technologies, and industry consolidation that has reduced price pressures in innovative as well as generic markets. Banning rebates will do nothing to address these trends.

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